HOUSTON, JULY 10 -- The leaders of the industrialized world remained sharply split tonight over international trade policy with the collapse of a possible compromise on the contentious issue of agriculture subsidies.

Aides worked into the night to bridge the differences between the United States and several European members of the so-called Group of Seven as they ended the second day of their three-day economic summit here.

But even members of the same delegation appeared uncertain whether a solution was in sight. Treasury Secretary Nicholas F. Brady insisted tonight that "substantial progress has been made," although "we haven't reached conclusive language."

Earlier, Agriculture Secretary Clayton Yeutter had presented a somewhat more negative view, saying President Bush would rather have a public statement of disagreement than vague language papering over the differences.

As the leaders toasted each other tonight at a formal dinner hosted by Bush at Houston's Museum of Fine Arts, the debate over trade made this 16th economic summit a much more free-form affair than its recent predecessors. Those were marked by communiques largely written before the leaders even met.

On another ticklish issue, the environment, the leaders took up a call by the Europeans and Canada to pledge swift and specific action to reduce emissions of "greenhouse gases," including carbon dioxide, that many researchers say contribute to global warming. The United States has opposed the adoption of specific targets and timetables for reducing the gases on ground that scientific evidence of the harm they cause remains inconclusive.

By late today, the group appeared headed toward an agreement that fell short of the European proposal. The Bush administration, according to sources, agreed to back a plan -- introduced by West German Chancellor Helmut Kohl as part of the overall greenhouse proposal -- for an international convention to preserve tropical rain forests. That agreement is expected to be part of a final summit communique scheduled for release Wednesday.

The European members of the group of seven industrialized democracies -- Britain, France, West Germany and Italy, along with members Japan and Canada -- appeared willing to accommodate the Bush administration's reluctance to go further, although British Prime Minister Margaret Thatcher argued forcefully that there was more than enough evidence to justify significant early reductions in emissions.

But the Europeans, particularly the European Community (EC), which is also represented here separately along with its G-7 members, were less accommodating on the subject of trade. The disagreement revolves around longstanding U.S. insistence that the developed countries, particularly the EC, stop

protecting their farmers from outside competition by means of internal subsidies and high tariff barriers.

That issue has become crucial

to a successful resolution of the stalled international trade talks known as the Uruguay Round, now in their fourth year of negotiations and scheduled for completion in December.

The Europeans, who insist the subsidies are crucial to the smooth working of their 12-nation Common Market, had wanted the summit to give the talks a general political push toward completion without mentioning the subsidy dispute in the final communique. But Bush pressed the farm trade issue from the outset, to the dismay of some of his summit partners.

It appeared late Monday night as if a compromise could be achieved on the basis of a framework put forward recently by the chairman of the agricultural negotiating committee for the Uruguay Round, Aart DeZeeuw, a Dutch official. While not completely acceptable to the administration, the proposal does call for reductions in farm subsidies and agricultural trade barriers. Canada has also been a strong backer of the proposal.

According to U.S. officials,

West Germany, one of the principal backers of continuing subsidies, agreed to some variation of the DeZeeuw plan as the basis for new instructions from the summit to the trade negotiators. But sources said Kohl had backed down under pressure from the EC, represented here by its president, Jacques Delors.

Late this morning, Thatcher put on the table a new compromise variation of the DeZeeuw plan that British officials characterized as "a breakthrough" possibly acceptable to both sides.

But Yeutter described it as "completely unacceptable," and said Bush had rejected it. Bush then tabled a counterproposal, similar in many respects to the original DeZeeuw framework.

A senior aide to Thatcher, asked whether the United States and the Europeans were engaged in brinksmanship, said, "Very probably." He said Thatcher, who has often stood alone in opposing farm subsidies within the EC, had been trying to serve as honest broker and had "no problem" with the Bush counterproposal. "But a number of our participants," he said, "would be quite happy without it."

Farm trade is a touchy issue with France and West Germany, whose farmers benefit most from the EC subsidies. Kohl is in an

especially sensitive position, with farm votes in both West and East Germany crucial to his ruling party in the all-German parliamentary elections scheduled for Dec. 2.

But German and U.S. sources indicated that he could be more forthcoming immediately after the elections, which precedes the start of the final trade talks by less than a week.

Staff writers Dan Balz and Hobart Rowen contributed to this report.